IRS Fact Sheet FS-2026-14 (Aug. 19, 2026); Internal Revenue News Release IR-2026-94 (Aug. 19, 2026)

On August 19, 2026, the Internal Revenue Service (IRS) released Fact Sheet FS-2026-14, which immediately supersedes the prior Fact Sheet FS-2025-09 (originally issued on December 23, 2025). Announced in News Release IR-2026-94, this update provides tax professionals—including Certified Public Accountants (CPAs) and Enrolled Agents (EAs)—with critical administrative and substantive guidance. The new release integrates the long-standing provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 with the recent structural changes and clarifications enacted under the One, Big, Beautiful Bill Act (P.L. 119-21).

Tax practitioners must grasp the structural shifts in the IRS’s presentation, the deletion of defunct legislative provisions, and the addition of crucial administrative transition rules. Crucially, the IRS has introduced Revenue Procedure 2026-17, which provides a path for certain taxpayers to withdraw historical excepted trade or business elections. This article analyzes the technical mechanics of the Section 163(j) limitation under the new Fact Sheet, evaluates the key differences from the superseded FS-2025-09 guidance, and explains the IRS’s underlying rationale for this timely update.

Rationale and Context for the August 2026 Update

The IRS’s decision to issue FS-2026-14 is driven by three main factors: temporal legislative obsolescence, the need to distinguish statutory clarifications from substantive law changes under the One, Big, Beautiful Bill Act, and the release of new procedural transition guidance.

First, the IRS has removed the frequently asked questions (FAQs) concerning the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. The CARES Act temporary modifications—such as retroactively increasing the Adjusted Taxable Income (ATI) limitation threshold to 50% and allowing 2019 ATI substitution elections—only applied to taxable years beginning in 2019 and 2020. Because these tax years are now closed under the standard statute of limitations for the vast majority of taxpayers, the IRS determined that deleting the CARES Act FAQs (previously housed in Topic D of FS-2025-09) was necessary to streamline the guidance and prevent taxpayer confusion.

Second, the IRS redesigned the layout to provide conceptual clarity regarding the One, Big, Beautiful Bill Act. Topic E of FS-2025-09 has been re-designated as Topic D in FS-2026-14. Within this new Topic D, the IRS introduced an important technical distinction between a substantive statutory “change” and a “clarification” of existing law. The IRS appended a prominent introductory warning under the Topic D heading:

“NOTE: The use of the term “change” in this Topic D is intended to reference changes to the underlying statutory language and not to indicate any change in the operative effect of the applicable law. This Topic has been revised (from that appearing in FS 2025-09) to distinguish between substantive changes in law and clarifications of existing law.”

This administrative distinction protects both the government and taxpayers by clarifying where the One, Big, Beautiful Bill Act modified the operative effects of Section 163(j) and where it merely codifies long-standing regulatory positions.

Third, the updated Fact Sheet incorporates critical transition guidance under Revenue Procedure 2026-17. The One, Big, Beautiful Bill Act’s alterations to the calculation of ATI and the depreciation rules under Section 168(k) modified the economic incentives for choosing excepted trade or business status. The IRS issued FS-2026-14 to direct practitioners to the new procedures under Revenue Procedure 2026-17 for withdrawing these previously irrevocable elections.

Core Mechanics of the Section 163(j) Limitation

Under Internal Revenue Code (IRC) § 163(j)(1), the deduction for business interest expense is capped. If the limitation applies, the deductible business interest expense for any taxable year cannot exceed the sum of:

The taxpayer’s business interest income for the taxable year;
30% of the taxpayer’s Adjusted Taxable Income (ATI) for the taxable year; and
The taxpayer’s floor plan financing interest expense for the taxable year.

Any business interest expense disallowed under this formula is carried forward to the succeeding taxable year as a disallowed business interest expense carryforward under IRC § 163(j)(2).

Updated Inflation-Adjusted Thresholds for Small Businesses

Pursuant to IRC § 163(j)(3), certain small businesses are exempt from the Section 163(j) interest limitation. To qualify for the exemption, the business must meet the gross receipts test of IRC § 448(c). This test is met if the taxpayer is not a “tax shelter” as defined under IRC § 448(d)(3) and has average annual gross receipts for the three-taxable-year period preceding the current tax year at or below an inflation-adjusted threshold.

The IRS updated the inflation-adjusted gross receipts amounts in Topic A, Question 3 to reflect the latest figures:

Tax Year 2024: $30 million
Tax Year 2025: $31 million
Tax Year 2026: $32 million

The addition of the $32 million threshold for 2026 is a key update in FS-2026-14, ensuring practitioners have the exact figure for current-year tax planning.

Under Treas. Reg. § 1.163(j)-2(d)(1) and § 1.163(j)-9(b), small businesses that are close to the threshold may make a “protective election” to be treated as an excepted trade or business. This protective filing eliminates the need to perform complex three-year gross receipts calculations when the taxpayer is uncertain of its exempt status.

Substantive Amendments under the One, Big, Beautiful Bill Act

The One, Big, Beautiful Bill Act introduced three major substantive modifications to Section 163(j) that alter the operative calculations of the interest limitation.

Depreciation, Amortization, or Depletion Addback to ATI

For taxable years beginning after December 31, 2021, and before January 1, 2025, deductions for depreciation, amortization, or depletion were excluded from the addbacks when calculating ATI. This exclusion significantly depressed ATI, thereby lowering the maximum interest deduction for capital-intensive businesses.

The One, Big, Beautiful Bill Act amended Section 163(j) to reinstate the addback of these deductions. For taxable years beginning after December 31, 2024, taxpayers are permitted to increase ATI by adding back “deductions for depreciation, amortization, or depletion to taxable income”. This amendment represents a major benefit, as it “may benefit the taxpayer by increasing ATI allowing for a higher limitation amount on the calculation of business interest”.

Expansion of Floor Plan Financing Indebtedness

Under IRC § 163(j)(9), floor plan financing interest is fully deductible and is not subject to the 30% ATI cap. Historically, floor plan financing indebtedness was restricted to debt used to finance the acquisition of “motor vehicles” held for sale or lease, defined as self-propelled vehicles, boats, or farm machinery.

For taxable years beginning after December 31, 2024, the One, Big, Beautiful Bill Act expanded the definition of a motor vehicle to include:

“any trailer or camper which is designed to provide temporary living quarters for recreational, camping or seasonal use and is designed to be towed by, or affixed to, a motor vehicle.”

This substantive change extends full interest deductibility to recreational vehicle (RV) and camper dealerships, providing significant relief to this specific retail sector.

Exclusion of Controlled Foreign Corporation Inclusions from ATI

A key international tax change applies to tax years beginning after December 31, 2025. The One, Big, Beautiful Bill Act amended Section 163(j) to exclude a U.S. shareholder’s Controlled Foreign Corporation (CFC) income inclusion items under IRC §§ 951(a) (Subpart F), 951A(a) (GILTI), and 78 (associated dividend gross-up), including any associated portions of deductions, from the computation of ATI.

Under prior law, domestic shareholders could increase their ATI by these international inclusions, raising their domestic interest deduction limit. The IRS clarified the immediate impact of this legislative reversal on existing administrative guidance:

“As a result of this change, a U.S. shareholder will no longer be allowed to increase its ATI by a portion of CFC income inclusions. Accordingly, the proposed regulations under Treas. Reg. § 1.163(j)-7(j) that were issued in September 2020 are no longer consistent with current law and taxpayers can no longer rely on them for tax years beginning after Dec. 31, 2025.”

This represents a major compliance trap. While the Treasury and the IRS “plan to issue guidance that addresses these changes and clarifications,” the Fact Sheet makes it clear that historical reliance on the 2020 proposed regulations is terminated for post-2025 tax years.

Statutory Clarifications under the One, Big, Beautiful Bill Act

Unlike the substantive amendments described above, the One, Big, Beautiful Bill Act also included provisions that the IRS classifies as mere clarifications of existing law.

Specifically, the Act clarified the coordination between Section 163(j) and other statutory capitalization rules. Except for interest capitalized under IRC § 263(g) (relating to straddles) or IRC § 263A(f) (the uniform capitalization rules), Section 163(j) is applied before any mandatory or elective interest capitalization provisions. The IRS emphasized this ordering rule by stating:

“except for interest that is capitalized under sections 263(g) or 263A(f), section 163(j) applies to all business interest expense regardless if any portion would otherwise be deducted or capitalized under a mandatory or elective interest capitalization provision.”

Consequently, business interest expense excludes any interest capitalized under Sections 263(g) or 263A(f), but includes all other interest. Crucially, the IRS notes that “these clarifications do not reflect a change in Treasury and IRS position”. Instead, they simply codify the positions already set forth in Treas. Reg. § 1.163(j)-3(b).

Additionally, the Fact Sheet clarifies that for tax years beginning after December 31, 2025, no portion of any disallowed business interest carried forward to a succeeding year is treated as interest to which an interest capitalization provision applies.

Excepted Trade or Business Elections and Revenue Procedure 2026-17

Under IRC § 163(j)(7), certain trades or businesses are carved out from the interest limitation, including electing real property trades or businesses and electing farming businesses. While electing excepted status allows for an unlimited interest deduction, it carries significant negative consequences under IRC § 168(k):

Electing real property businesses must depreciate nonresidential real property, residential rental property, and qualified improvement property under the Alternative Depreciation System (ADS), making them ineligible for bonus depreciation.
Electing farming businesses must depreciate assets with a recovery period of 10 years or more under ADS, also forfeiting bonus depreciation.

Historically, these elections were irrevocable and binding on the trade or business for all succeeding taxable years under Treas. Reg. § 1.163(j)-9.

However, because the One, Big, Beautiful Bill Act reinstated the depreciation/amortization addback to ATI for tax years starting after December 31, 2024, many taxpayers who previously elected excepted status to avoid the interest cap would now be better off maintaining non-excepted status to claim bonus depreciation.

Addressing this dilemma, the IRS updated FS-2026-14 to introduce Revenue Procedure 2026-17. While the One, Big, Beautiful Bill Act did not modify the statutory rules under Treas. Reg. §§ 1.163(j)-9 or 1.163(j)-1(b)(15)(iii), the IRS promulgated Revenue Procedure 2026-17 to provide:

“transition guidance for taxpayers who previously made these elections but now want to withdraw them in light of the One, Big, Beautiful Bill Act changes to sections 163(j)(8) and 168(k).”

Furthermore, references to Revenue Procedure 2026-17 have been integrated into the administrative guidelines for electing trades or businesses (Topic B, Questions 2 & 3) and foreign corporations (Topic C, Question 11), replacing defunct references to CARES Act procedures such as Revenue Procedures 2020-22 and 2020-25.

Flow-Through and Entity-Level Application Mechanics

For partnerships and S corporations, the Fact Sheet reiterates that the Section 163(j) limitation is applied strictly at the entity level.

For S corporations, any disallowed business interest expense is carried forward at the corporate level and is not allocated directly to the shareholders. Corporate-level excess taxable income and excess business interest income are allocated to shareholders on a pro-rata basis.

For partnerships, disallowed business interest expense is allocated to each partner as Excess Business Interest Expense (EBIE) in the same manner as non-separately stated taxable income or loss. This EBIE is carried forward at the partner level. Partners can only deduct EBIE in succeeding years to the extent they are allocated excess taxable income or excess business interest income from the same partnership.

Furthermore, the Fact Sheet maintains the complex interaction with the partner basis limitations under Treas. Reg. § 1.163(j)-6(h). Tax practitioners must account for business interest expense under a separate IRC § 704(d) basis loss class. This class comprises deductible business interest, EBIE allocated in the current year, and suspended EBIE from prior years. When applying the basis limitation, deductible business interest is treated as taken into account before any current-year or suspended EBIE.

Prepared with assistance from Gemini Notebook.